ARB Berhad (KLSE:ARBB) Held Back By Insufficient Growth Even After Shares Climb 43%

ARB Berhad (KLSE:ARBB) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. But the last month did very little to improve the 52% share price decline over the last year.

Even after such a large jump in price, ARB Berhad may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.2x, since almost half of all companies in the IT industry in Malaysia have P/S ratios greater than 1.4x and even P/S higher than 4x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for ARB Berhad

What Does ARB Berhad's Recent Performance Look Like?

For example, consider that ARB Berhad's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ARB Berhad's earnings, revenue and cash flow.

How Is ARB Berhad's Revenue Growth Trending?

In order to justify its P/S ratio, ARB Berhad would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 29%. Regardless, revenue has managed to lift by a handy 22% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 9.6% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why ARB Berhad is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On ARB Berhad's P/S

Despite ARB Berhad's share price climbing recently, its P/S still lags most other companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of ARB Berhad confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 3 warning signs for ARB Berhad (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.